In: Finance
National Business Machine Co. (NBM) has $4 million of extra cash
after taxes have been paid....
National Business Machine Co. (NBM) has $4 million of extra cash
after taxes have been paid. NBM has two choices to make use of this
cash. One alternative is to invest the cash in financial assets.
The resulting investment income will be paid out as a special
dividend at the end of three years. In this case, the firm can
invest in Treasury bills yielding 3 percent or a 5 percent
preferred stock. IRS regulations allow the company to exclude from
taxable income 70 percent of the dividends received from investing
in another company’s stock. Another alternative is to pay out the
cash now as dividends. This would allow the shareholders to invest
on their own in Treasury bills with the same yield, or in preferred
stock. The corporate tax rate is 34 percent. Assume the investor
has a 30 percent personal income tax rate, which is applied to
interest income and preferred stock dividends. The personal
dividend tax rate is 15 percent on common stock dividends.
Suppose the company reinvests the $4 million and pays a dividend
in three years.
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What is the total aftertax cash flow to shareholders if the
company invests in T-bills? (Enter your answer in dollars,
not millions of dollars, e.g., 1,234,567. Do not round intermediate
calculations and round your final answer to 2 decimal places, e.g.,
32.16.)
|
Value in three years = 3,605,985.20 ± 0.01% |
What is the total aftertax cash flow to shareholders if the
company invests in preferred stock? (Enter your answer in
dollars, not millions of dollars, e.g., 1,234,567. Do not round
intermediate calculations and round your final answer to 2 decimal
places, e.g., 32.16.)
|
Suppose instead that the company pays a $4 million dividend now
and the shareholder reinvests the dividend for three years.
|
What is the total aftertax cash flow to shareholders if the
shareholder invests in T-bills? (Enter your answer in
dollars, not millions of dollars, e.g., 1,234,567. Do not round
intermediate calculations and round your final answer to 2 decimal
places, e.g., 32.16.)
|
Value in three years = 3,618,729.69 ± 0.01% |
What is the total aftertax cash flow to shareholders if the
shareholder invests in preferred stock? (Enter your answer
in dollars, not millions of dollars, e.g., 1,234,567. Do not round
intermediate calculations and round your final answer to 2 decimal
places, e.g., 32.16.)
|
Value in three years = 3,769,640.78 ± 0.01% |